The back story on Cash for Clunkers and $8,000 home purchase credit
Posted by on Monday, September 21, 2009
Under: Columns
http://www.pocatelloshops.com/new_blogs/politics/?p=5204
The Cash for Clunkers and $8,000 Home Purchase Tax Credit are very interesting economic programs. Economics for me boils down to two main forces: supply and demand. When allowed to act freely, supply will balance with demand and set the appropriate price and quantity. However, government influence to increase demand or reduce supply keeps prices higher than the market would. Unfortunately, government programs typically punish those, like the poor, they claim to help, reward the rich and create “bubbles” or short term fixes to long term problems. I mention this because it explains how programs like the $8,000 Home Purchase Tax Credit and Cash for Clunkers programs are conceived. Wouldn’t it be great if everyone could have a home or purchase a newer car? But that just isn’t reality; people generally get what they earn.
First let’s discuss the $8,000 Home Purchase Tax Credit. This credit temporarily benefits a few and punishes the rest. How? An $8,000 tax credit benefits the seller by increasing demand which keeps prices higher than normal because there are more buyers competing for homes. These higher prices result in additional commissions for loan origination, appraisal and realtor fees. Increased home prices are only temporary and will immediately disappear once the credit is discontinued; this is something that the buyer should be aware of. Is this credit something we want to continue forever?
As you peel away the credit, it has two even more devious beneficiaries.
First are the investors who have time to sell their investments or leverage them until the credit is removed. Secondly is local government. Governments are in a desperate situation conjuring many ways to get tax revenue like the unfathomable rise of assessments in Bannock County. As mentioned, increased demand raises home prices above market value and governments are benefiting from the $8,000 credit because it is keeping home prices artificially high. And this punishes EVERY property owner first to subsidize the $8,000 credit and second with higher property taxes. As for the buyer, the $8,000 tax credit will disappear when you reduce it by the additional amount of loan interest, origination fees, drop in home price and related property taxes that the consumer would otherwise not pay.
Cash for Clunkers also increases demand and related price for autos that otherwise would not be. And in many parts of the country, autos are assessed as property and receive property taxes. Like with homes, the artificial increase in price keeps the taxable base higher than it ought to be. One interesting thought on this is that the Cash for Clunkers program affects the supply side by destroying vehicles. The reduction of the supply side will also keep pressure for higher prices. Once this program goes away, the bubble will burst and the price of vehicles will drop.
I used to have a boss who said when someone says “It’s not about the money”—it’s about the money! I often repeat this when I want to understand something. It is a recurring theme from the left that big business is corrupt and I agree that much of it is. The results of Cash for Clunkers and the $8,000 home purchase credit are that the poor won’t have as many older cars or cheaper homes to purchase. How ironic!
Now I refuse to assume that the liberal Democratic Congress is this stupid. They are not! They know what they are doing will benefit big business and big government; and ladies and gentlemen that is the plan. As I have stated before, we have one party with two faces, Democrats and Republicans. On a national level if you vote Republican, they win, and if you vote in Democrats they win. So if you want your republic back then the people need to be objective, aligning their votes with principles and not personalities. If a Republican, like George W. Bush, abandons the Constitution with TARP, the Patriot Act, Iraq War, etc. he must be held accountable and likewise as President Obama continues on the Bush path, he too must be held accountable. Please do not get caught up in the Republican and Democrat bickering. It is meant to deceive and throw you off course. Fortunately this happens more nationally than locally. However, on all levels we need to do a better job of electing public officials who first understand and second honor the U.S. Constitution.
Carl Stoddard is an accounting and finance professional in Southern Idaho. He can be reached at carlstoddard@yahoo.com or (208) 226-4901.
The Cash for Clunkers and $8,000 Home Purchase Tax Credit are very interesting economic programs. Economics for me boils down to two main forces: supply and demand. When allowed to act freely, supply will balance with demand and set the appropriate price and quantity. However, government influence to increase demand or reduce supply keeps prices higher than the market would. Unfortunately, government programs typically punish those, like the poor, they claim to help, reward the rich and create “bubbles” or short term fixes to long term problems. I mention this because it explains how programs like the $8,000 Home Purchase Tax Credit and Cash for Clunkers programs are conceived. Wouldn’t it be great if everyone could have a home or purchase a newer car? But that just isn’t reality; people generally get what they earn.
First let’s discuss the $8,000 Home Purchase Tax Credit. This credit temporarily benefits a few and punishes the rest. How? An $8,000 tax credit benefits the seller by increasing demand which keeps prices higher than normal because there are more buyers competing for homes. These higher prices result in additional commissions for loan origination, appraisal and realtor fees. Increased home prices are only temporary and will immediately disappear once the credit is discontinued; this is something that the buyer should be aware of. Is this credit something we want to continue forever?
As you peel away the credit, it has two even more devious beneficiaries.
First are the investors who have time to sell their investments or leverage them until the credit is removed. Secondly is local government. Governments are in a desperate situation conjuring many ways to get tax revenue like the unfathomable rise of assessments in Bannock County. As mentioned, increased demand raises home prices above market value and governments are benefiting from the $8,000 credit because it is keeping home prices artificially high. And this punishes EVERY property owner first to subsidize the $8,000 credit and second with higher property taxes. As for the buyer, the $8,000 tax credit will disappear when you reduce it by the additional amount of loan interest, origination fees, drop in home price and related property taxes that the consumer would otherwise not pay.
Cash for Clunkers also increases demand and related price for autos that otherwise would not be. And in many parts of the country, autos are assessed as property and receive property taxes. Like with homes, the artificial increase in price keeps the taxable base higher than it ought to be. One interesting thought on this is that the Cash for Clunkers program affects the supply side by destroying vehicles. The reduction of the supply side will also keep pressure for higher prices. Once this program goes away, the bubble will burst and the price of vehicles will drop.
I used to have a boss who said when someone says “It’s not about the money”—it’s about the money! I often repeat this when I want to understand something. It is a recurring theme from the left that big business is corrupt and I agree that much of it is. The results of Cash for Clunkers and the $8,000 home purchase credit are that the poor won’t have as many older cars or cheaper homes to purchase. How ironic!
Now I refuse to assume that the liberal Democratic Congress is this stupid. They are not! They know what they are doing will benefit big business and big government; and ladies and gentlemen that is the plan. As I have stated before, we have one party with two faces, Democrats and Republicans. On a national level if you vote Republican, they win, and if you vote in Democrats they win. So if you want your republic back then the people need to be objective, aligning their votes with principles and not personalities. If a Republican, like George W. Bush, abandons the Constitution with TARP, the Patriot Act, Iraq War, etc. he must be held accountable and likewise as President Obama continues on the Bush path, he too must be held accountable. Please do not get caught up in the Republican and Democrat bickering. It is meant to deceive and throw you off course. Fortunately this happens more nationally than locally. However, on all levels we need to do a better job of electing public officials who first understand and second honor the U.S. Constitution.
Carl Stoddard is an accounting and finance professional in Southern Idaho. He can be reached at carlstoddard@yahoo.com or (208) 226-4901.
In : Columns
